National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Exemptions

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Contingent Future Interest In Tenancy by Entirety Not Exempt

Where state exemption law does not specifically apply to a contingent future interest in a tenancy by the entirety, the interest is not exempt under bankruptcy law and the debtor cannot avoid a judgment lien under section 522(f). In re Jaffe, No. 18-2726 (7th Cir. Aug. 5, 2019).

Including a mini-tutorial on the history of women’s property rights, from coverture (married woman’s property interests absorbed by her husband), to tenancy by the entirety (co-ownership and transfer to surviving spouse), to the Married Women’s Property Acts (providing means for women to own property and emerge from financial and social dependency), the circuit court explored the interaction of bankruptcy exemptions and Illinois property law.

The debtor entered bankruptcy owning his residence with his wife as a tenant in the entirety. When his wife died post-bankruptcy, he sought to exempt his entire fee simple interest in the property and avoid his creditor’s judgment lien under section 522(f) as impairing his exemption. The district court found that he could do so, and the creditor appealed.

[Read more…] about Contingent Future Interest In Tenancy by Entirety Not Exempt

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Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

Under the totality of the circumstances test, the bankruptcy court erred when it found that the debtor’s student loans of $106,000 were not dischargeable as undue hardship because she had sufficient exempt equity in her home to fully repay the debt. Schatz v. Access Group, No. 18-16 (B.A.P. 1st Cir. July 26, 2019).

To increase her earning potential, Audrey Schatz, a single mother, obtained a law degree when she was in her fifties, financing her education with student loans. After she graduated and passed the bar, however, Ms. Schatz spent three years unsuccessfully seeking work in her field. Ultimately, she earned minimal income through a variety of avenues including self-employment, operation of a legal non-profit for low-income clients, using her home as an Air BnB, and performing real estate closings.

[Read more…] about Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

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7th Circuit Certifies Workers’ Compensation Exemption Question to Illinois Supreme Court

The Seventh Circuit Court of Appeals has certified a question to the Illinois Supreme Court concerning “whether the Illinois Workers’ Compensation Act [IWCA], as amended, allows care-provider creditors to reach the proceeds of workers’ compensation claims.” In re Hernandez, No. 18-1789 (7th Cir. March 18, 2019).

When Elena Hernandez filed for chapter 7 bankruptcy, she listed a workers’ compensation claim in the amount of $31,000 and claimed the entire amount as exempt under Illinois law. She also listed health care debts arising out of work-related injuries of over $130,000. She settled her workers’ compensation claim shortly after filing her bankruptcy petition. The healthcare providers objected to the exemption on two bases: first, that the IWCA as amended, permitted them to reach the workers’ compensation settlement; and second, that the settlement was the product of fraud. After a hearing, the bankruptcy court denied the exemption on the basis of fraud without reaching the statutory objection. The district court, however, based its affirmance on interpretation of the IWCA. Ms. Hernandez appealed to the Seventh Circuit.

Section 21 of the IWCA provides: “No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages.” Although the Illinois Supreme Court has never addressed the issue, the parties do not dispute that this section creates an exemption in bankruptcy for workers’ compensation claims. The disagreement arises out of whether amendments to the Illinois statute carved out an exception to this exemption for healthcare providers.

In 2005, the Illinois legislature amended the IWCA by limiting how much healthcare providers can charge for treatment of work-related injuries. In the case of undisputed claims, the amendments permit healthcare providers to bill and be paid by the employers directly. The amendments also ended the practice of allowing a healthcare provider to bill the employee for any fees not paid by the employer. Where the employer disputes the workers’ compensation claim, the amendments provide that if the employee challenges the employer’s position, the healthcare provider may not bill the employee or the employer until resolution of the dispute, and the statute of limitations on the debt is tolled. Perhaps most significantly, under new section 8.2(e-20) of the IWCA, in the event a disputed workers’ compensation claim is settled, the healthcare provider is then free to seek payment from the employee. The Illinois legislature did not alter the language of section 21.

The healthcare providers argued that permitting Ms. Hernandez to exempt her workers’ compensation settlement from the reach of the work-injury healthcare providers would obviate the language of section 8.2(e-20), and run counter to the state legislature’s intention of allowing healthcare providers access to workers’ compensation funds in exchange for capping the amounts they can charge for treatment.

On the other hand, Ms. Hernandez argued that section 21 was not altered by the amendments and had the state legislature intended to create an exception to the exemption, it could have done so in plain language.

The Seventh Circuit found merit to both sides. Adopting the healthcare providers’ view would harmonize with the legislature’s obvious goal of protecting those providers and would advance the goal of encouraging healthcare providers to provide care to people injured in work-related accidents. The court agreed, however, that while Ms. Hernandez’s interpretation would hinder the effectiveness of the amendments, it would not necessarily render any provision absurd or surplusage.

Finding itself “genuinely uncertain about a question of state law that is key to a correct disposition” of the case before it, the circuit court granted the parties’ motion to certify the following question to the Illinois Supreme Court:

“After the 2005 amendments to 820 ILL. COMP. STAT. 305/8 and the enactment of 305/8.2, does section 21 of the Illinois Workers’ Compensation Act exempt the proceeds of a workers’ compensation settlement from the claims of medical-care providers who treated the illness or injury associated with that settlement?”

Hernandez 7th Cir March 2019 cert question

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Debtor Cannot Exempt His Interest in Ex-Wife’s Retirement Accounts

Accounts the debtor received from his ex-wife in a divorce were not retirement accounts for bankruptcy exemption purposes because, even though his ex-wife had contributed to the accounts for retirement, his interest was merely through a property settlement. Lerbakken v. Sieloff and Assoc., P.A., No. 18-6018 (B.A.P. 8th Cir., Oct. 16, 2018).

The bankruptcy court disallowed chapter 7 debtor, Brian Lerbakken’s, claimed exemptions for a 401K account and an IRA that he had received in a property settlement when he and his wife divorced. The funds in the accounts were contributed in their entirety by his ex-wife. [Read more…] about Debtor Cannot Exempt His Interest in Ex-Wife’s Retirement Accounts

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Property Tax Refund Not “Based on Need” for Exemption Purposes

The debtor’s tax refund under Minnesota’s Property Tax Refund Act was not “government assistance based on need,” and therefore she could not exempt it in her bankruptcy. Hanson v. Seaver (In re Hanson), No. 17-1192 (8th Cir. Sept. 11, 2018).

The circuit court affirmed the BAP’s finding that chapter 7 debtor, Sheri Hanson, could not exempt her tax refund under Minnesota’s Property Tax Refund Act (PTRA), which provides for taxpayers to receive a refund when their property taxes exceed a certain percentage of their household income. [Read more…] about Property Tax Refund Not “Based on Need” for Exemption Purposes

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Impairment to Exemption Calculation Based on Debtor’s Half Interest in Property

A debtor seeking to avoid a lien as impairing a homestead exemption must calculate the impairment using his proportionate interest in the property and the sum of the corresponding mortgage liens in proportion to that interest. Sandoval Irrevocable Trust v. Taylor, No. 17-1241 (10th Cir. Aug. 14, 2018).

As a result of Mark Taylor’s misappropriation of funds from an Irrevocable Trust for which he was trustee, the Trust (Sandoval) obtained state court judgments against him and liens against his residence. Mr. Taylor filed for chapter 13 bankruptcy and listed the property, which he co-owned with his ex-wife, as having a total value of $560,000 with his portion amounting to $280,000. He later converted his case to chapter 7 and moved to avoid the judgment liens as impairing his state homestead exemption of $37,500. [Read more…] about Impairment to Exemption Calculation Based on Debtor’s Half Interest in Property

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Debtor Wins Battle of the Code Sections: Exemption vs Set-Off

A debtor’s right to an exemption for a tax refund overrides the IRS’s right to set-off of that refund to pay tax liabilities. United States of Amer. v. Copley, No. 16-207 (E.D. Va. Sept. 10, 2018).

In their chapter 7 bankruptcy, Matthew and Jolinda Copley listed tax liabilities for the years 2008, 2009, and 2010, as priority claims held by the IRS. They also sought to exempt their 2013 tax refund of $3,208.00. But the IRS withheld the refund as set-off against a portion of the tax debts. The bankruptcy court ordered the IRS to turn over the refund to the debtors. [Read more…] about Debtor Wins Battle of the Code Sections: Exemption vs Set-Off

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Court May Not Deny Exemption Due to Debtor Misconduct

“A bankruptcy court has no authority under federal law to deny a debtor’s claim of exemptions on a ground that is not specified in the bankruptcy code.” Rucker v. Belew (In re Belew), No. 18-6007 (B.A.P. 8th Cir. Sept. 6, 2018).

Johnny Belew sought to amend his schedules to exempt assets he had failed initially to disclose. The trustee objected. The bankruptcy court found that it had no authority to deny a motion to amend exemptions for any reason not specified in the Code and overruled the trustee’s objections. The trustee appealed. [Read more…] about Court May Not Deny Exemption Due to Debtor Misconduct

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Fourth Circuit Applies Choice of Law Approach to Exemptions

The “state-specific” approach to application of exemption laws applies when determining whether the debtor may use the exemptions from his former domicile state with respect to property located in the bankruptcy state. Sheehan v. Ash, No. 17-1867 (4th Cir. May 4, 2018).

In their chapter 7 bankruptcy filed in West Virginia, Keith and Phyllis Ash sought to apply the exemption laws of their prior domicile state, Louisiana, to exempt approximately $3,500 in various items of personal property located in West Virginia. The trustee objected to application of Louisiana exemption law. The bankruptcy court overruled the objection and the district court affirmed. Sheehan v. Ash, No. 1:16-cv-109 (N.D. W. Va. June 27, 2017). [Read more…] about Fourth Circuit Applies Choice of Law Approach to Exemptions

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Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7

Proceeds from the post-petition sale of the chapter 7 debtor’s homestead did not become part of the bankruptcy estate even though the debtor did not reinvest them in another homestead. Lowe v. DeBerry (In re DeBerry), No. 17-50315 (5th Cir. March 7, 2018).

When Curtis DeBerry filed for chapter 7 bankruptcy he exempted his homestead without objection by the trustee. Post-petition he sold the residence and transferred some of the proceeds to his wife and used the rest to pay unrelated criminal attorney fees. The trustee filed an adversary complaint arguing that, because Mr. DeBerry did not reinvest the proceeds in another homestead within six months as required by Texas proceeds law, the proceeds were not exempt. The bankruptcy court found in favor of Mr. DeBerry and the district court reversed. [Read more…] about Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7